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description

In June 2003, 10 leading international banks adopted new voluntary guidelines, called the Equator Principles, to promote sustainable development in project finance. In recent years, nongovernmental organizations (NGOs) had raised issues about the lenders' responsibilities in projects that could harm the environment and/or society. Although many banks had environmental policies in place, a uniform industry standard did not exist. The principles, borrowed from and with the active support of the World Bank's International Finance Corp. (IFC), established guidelines to ensure that banks financed only projects that were "socially responsible and reflected sound environmental management practices." Some NGOs applauded the banks' efforts, others criticized the principles for reasons related to their scope, implementation procedures, and enforcement mechanisms. The Equator banks had to decide what to do next. They could try to recruit more banks (and export credit agencies), develop implementation procedures, or respond to the criticism directly.

learning objective:

To explore what role and responsibilities, if any, financiers (particularly commercial banks) have to ensure that risks to the environment and society are appropriately managed in large-scale projects. To highlight the challenges of developing and implementing industry-wide policies on sustainable development. To assess the likely effectiveness of voluntary standards for environmental and social accountability and to determine the extent to which such standards change the competitive landscape.